China Big Four Banks a Huge Buying Opportunity: Goldman

Shares of China’s big four banks, which have declined up to 20 percent over the last three months, are poised for a sharp rebound as the government’s recent pro-growth policy moves boost demand for loans, say analysts at Goldman Sachs.

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Pedestrians walk past a branch of the Industrial and Commercial Bank of China (ICBC) in Shanghai.

“We believe the current near-trough valuation of China banks has overly discounted near-term macro downside risks, and expect a rebound in share prices on (a) cyclical macro recovery,” Ning Ma and Bowei Cheng, analysts at Goldman Sachs, said in a note.

Worries over a slowdown in earnings growth have led investors to sell shares in Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), Bank of China (BOC) and China Construction Bank (CCB) in the recent months.

Goldman Sachs has a buy call on ICBC, BOC and ABC, with a 12-month price target of HK$7.00 ($0.90), HK$4.20 and HK$4.90 respectively — marking 40-50 percent upside from current levels.

Ma and Cheng write the government’s shift towards growth from taming inflation will improve loan demand particularly from fixed asset investment projects in the infrastructure and industrial space, and will help China achieve its 2012 new loans target of 8 trillion yuan ($1.26 trillion).

Last week, a state-backed newspaper reported that Beijing would fast-track approvals forinfrastructure investmentto combat a slowdown in the economy. Infrastructure investments make up 20 percent of China’s total fixed asset investments, according to HSBC.

Beijing also announced earlier this month a series of small measures to boost consumer spending, including a scheme of subsidies for energy efficient white goods.

May Yan, a banking analyst atBarclays, agrees that the government’s new round of stimulus will be a positive for the stocks, forecasting 20-30 percent gains for the big four banks over the next 12 months.

“As stimulus takes place, we are going to see an increase in loan growth, investments growth and macro indicators will possibly turn more positive as well,” Yan said.